Question

A bond has a 10 percent coupon rate, makes annual payments, matures in 12 years, and has a yield-to-maturity of 7 percent.

1. Given this: a. What is the price of the bond today? b. What is the bond’s current yield? c. Based on the yield-to-maturity and the current yield, what is the bond’s expected capital gains yield over the next year?

2. One year from now the bond will have 11 years until maturity. Assume market interest rates remain at 7 percent. Given this: d. What will be the bond’s price one year from now? e. What will be the current yield one year from now? f. If you purchased the bond at the price in (a) and sold the bond at the price in (d) what would be your capital gain (or loss) once you sold? What would be your annualized holding period return (HPR)? (Remember that the HPR accounts for any coupon income earned during the holding period as well as the capital gain or loss that you incurred)

3. One year from now the bond will have 11 years until maturity. Assume market interest rates increase to 9 percent. Given this: g. What will be the bond’s price one year from now? h. If you purchased the bond at the price in (a) and sold the bond at the price in (g) what would be your capital loss once you sold? What would be your annualized holding period return?

4. One year from now the bond will have 11 years until maturity. Assume market interest rates decrease to 5 percent. Given this: i. What will be the bond’s price one year from now? j. If you purchased the bond at the price in (a) and sold the bond at the price in (i) what would be your capital gain (or loss) once you sold? What would be your annualized holding period return?

Answer 1

Please note i have answered first four sub parts as per policy. Thanks.